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From 1 July 2020, stamp duty will be imposed on the purchase of mutual funds, including systematic investment plans (SIPs) and systematic transfer plans (STPs), but not on the redemption of units. The duty will apply to all mutual funds—debt as well as equity. However, its impact will be felt the most on debt funds, which are typically held for short periods, as we explain below.
The stamp duty will be imposed at a rate of 0.005% on the purchase or switch-in amount. Apart from this, stamp duty will also be imposed on the transfer of mutual fund units such as transfers between demat accounts at 0.015%. Due to its design, the stamp duty is likely to have the most impact on short holding periods of 90 days or less.
Let us look at this impact with a more detailed example. If you invest ₹1 lakh in a debt fund and the annualized return is 5%, you will make ₹5,000 over the course of the year and ₹416 over one month (ignoring compounding to keep things simple). The stamp duty ( ₹5) looks big compared to the month’s return of ₹416. However if you hold the same fund for three months, you make ₹1,248. In this case the stamp duty ( ₹5 again) is a smaller share of the return. This impact gets smaller and smaller the longer you hold the fund.
Retail investors generally invest in liquid funds rather than overnight funds. "The stamp duty impact will be negligible for any holding period more than a month. So apart from your immediate monthly expenses, the case for mutual funds is not affected,"
